Editor’s Note: The following has been reprinted on PharmaManufacturing.com with special permission from Russia Profile (www.russiaprofile.org).

Previous economic crises in Russia scared away some Western pharmaceutical firms, but at least one is seeing opportunities in the current downturn. Sixteen years after being approached by a delegation from St Petersburg that included a young Vladimir Putin, the Swiss-based pharmaceutical multinational Nycomed is preparing to pour some 60 million euros into a new manufacturing plant in Russia.

“Russia isn’t a market – it’s a continent!” said Jostein Davidsen, general director of Nycomed Russia-CIS & senior vice president of the Nycomed Group, at a recent press conference in Moscow. How does one go about conquering a continent?

With 16 years at the helm of operations in the region – an unprecedented tenure in senior pharmaceutical management – Davidsen has led the operation from just 20 employees in the first Moscow office in 1993 to 1,200 staff working from 39 offices throughout the region today, from Kaliningrad to Vladivostok, from Murmansk to Almaty, Kazakhstan.

During the last decade of economic growth in Russia, Nycomed’s rapid expansion in headcount and penetration of the regions increased sales from just $26 million in 2000 to $243 million in 2008, up 22.9 percent from 2007, and outperforming the market in terms of growth from 2000 to 2008 twice over. Viewed in a global context, Nycomed Russia-CIS punches above its weight, delivering 9.8 percent of 2008 total sales to Nycomed Group, headquartered in Zurich, Switzerland. For Davidsen, the opportunities for growth during the first decade of this century were so enormous that anything less would have been tantamount to failure. “If you didn’t have performance like this during this time, you were basically doing something completely wrong in the market,” he said.

Today, the economic climate has cooled, as Russia is disproportionately affected by the global downturn, with the Organisation for Economic Cooperation and Development (OECD) projecting a 6.8 percent contraction of GDP for Russia in 2009, compared to an average fall of three percent for OECD member countries. The troika of ruble devaluation, collapsing oil prices, and declining consumption has led to a tough environment for the entire pharmaceutical industry. The Government is increasing price pressure on medicine costs, and the retail market is contracting as consumers turn to cheaper generic equivalents rather than pay for dearer branded medicines. Davidsen weathered the 1998 crisis when, for the first time, headcount at Nycomed Russia dropped – from 185 to 100 employees – but then quickly rebounded to 200 employees by 2001; as such he is sanguine about the current climate, which lacks the ideological issues or huge social changes associated with previous downturns: “The current crisis is much simpler than the one in the 90s,” he said.

Opportunities for Foreigners

Most of the 600-odd pharmaceutical manufacturing plants in Russia have not been upgraded since they were first built during the Soviet era. However, modern medicine manufacturing has progressed relentlessly, and standards for Good Manufacturing Practice (GMP) have been around since the middle of last century, with significant, internationally-agreed updates in 1991 and 2004. Although enshrined in Russian law in 1999, the push for companies to upgrade their plants has been little progress in the last decade. This is chiefly because of the prohibitive cost of upgrades, and the fact that that there are few, if any, sanctions for companies who violate this law.

It is a widely-held belief that if the Government enforces GMP upgrades, then the share of local manufacturers in the pharmaceutical industry will significantly drop – a result diametrically-opposed to the Government’s declared strategy of increasing the share of local manufacturers from some 20 percent in 2008 to 50 percent by 2020. With so little political capital to be made from pushing through GMP reforms, Russian pharmaceutical manufacturing remains vulnerable to counterfeiting and low quality generic production. But this reluctance to enforce standards is counter-productive - the net result is that consumers often turn to branded generics made by foreign manufacturers with a reputation for quality and reliability.

Despite the various challenges for a foreign manufacturer operating in Russia’s labyrinthine healthcare system, Nycomed Russia-CIS is setting itself ambitious targets in a market which analysts project may have a value of $20 billion by 2012 to 2013, and which is set to enter the top five global markets in value by 2015 – and Davidsen says he is scanning the horizon. “If we look at the current plans for Nycomed Group, the Russia-CIS region will represent 38 percent of the total growth of Nycomed in 2013, on sales reaching €900m,” he said. With increasing pressure from the government to control spiralling medicine costs and to promote local pharmaceutical manufacturing, the question is how will Nycomed Russia deliver on these targets?

Nycomed has taken a strategic decision to build a €60m manufacturing plant in Russia – 16 years after a trade delegation from St. Petersburg, led by the late Mayor Anatoly Sobchak, travelled to Nycomed group headquarters in 1993 to discuss inward investment. Davidsen recalled meeting a certain ambitious aide - Vladimir Putin - at the meeting, and wistfully added, “in 2009 we committed to invest in production in Russia, so its taken a couple of years from that meeting to today.”

For Davidsen this decision is “driven by the market” and reflects his conviction that the role of pricing and market access in Russia will be vital in ensuring success in the long-term as the government increasingly flexes its regulatory muscles. In December 2008 the Russian Ministry of Industry and Trade signed a decree pledging to purchase foreign pharmaceuticals only if they were offered at a 15 percent discount to existing domestic analogues. Yet incentives exist for foreign firms like Nycomed to “go local.” Russian Industry and Trade Minister Viktor Khristenko went on record earlier this year at an EU-level meeting in Munich saying that foreign manufacturers establishing plants in Russia would receive the same, preferential treatment as Russian firms in terms of pricing.

For Nycomed this is a serious concession, especially as its unusually mixed ethical and over-the-counter, in-licensed and proprietary product portfolio suits the needs of local prescribers, consumers – and their pockets. With such a mosaic-like portfolio of multiple stock-keeping units, Nycomed is aiming to focus production in the new plant on in-house products, particularly those which meet the criteria for therapeutic areas of growth, which will qualify for reimbursement and may be supported by a nascent general-practice specialty.

The decision to invest more than €60m in capital expenditure was taken by the Nycomed board in their Zurich headquarters last year, and a final green-field site will be decided in the third quarter of 2009 after the submission of a two-year survey of some 20 sites across Russia. It is not known whether the 1993 St. Petersburg delegation left a favourable impression or not, but in general, international firms prefer sites in the Moscow region or in the central European territory – despite free economic zones in Kaliningrad, and further east in Kazan.

Although Nycomed is not the first foreign pharmaceutical manufacturer to establish a plant in Russia – the independent French firm Servier opened a €40m plant in the Moscow region in July 2007 – it is one of the first to produce active pharmaceutical ingredients (API), as opposed to later-stage formulations, such as tablet or ampoule production. As such, Nycomed Russia is navigating uncharted territory, and Davidsen is using his experience to lead a task force on local manufacturing for the Moscow-based Association of International Pharmaceutical Manufacturers (AIPM), which represents the interests of foreign biopharmaceutical firms in Russia.

Reflecting on building a successful business in Russia, Davidsen likens investing in local manufacturing to planting “Russian roots” to succeed in a dynamic and newly reimbursement system. Apart from investing in bricks and mortar, local talent has been a key driver for Nycomed’s growth not just in Russia but in the Ukraine and Kazakhstan, where “brilliant management” has been a decisive factor in establishing Nycomed as market leader in Kazakhstan since 2004, and contributing to a low staff turnover, below 10 per cent per annum. With Davidsen reckoning on an economic upturn in 2011, many eyes will be monitoring Nycomed’s progress in the unpredictable, but valuable Russian market.

About the Author

Gerhard Symons is a doctoral researcher at the Centre for Health Management, Imperial College Business School, London

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